Mortgage experts: Any reason I shouldn't take a personal loan to pay off mortgage?

[Anonymous]

Here's my dilemma:

I own a house and property in another state that still has a mortgage and equity loan on it. Haven't lived in the house since Sept. 2008, it's not rented and not for sale. I don't believe it would sell for a fair price right now, so will probably just sit on it until things improve. I've been renting in NH since Oct. 2008, paying off credit card bills and trying to save a down payment for a house here. The CC bills and an old personal loan are now paid off. I've only managed to save $22k so far and will now have about $2400 a month to add to savings. I recently read somewhere here that a mortgage lender will want more than a 20% down payment on my next mortgage because I already have one. Makes me wish I'd paid that down, instead of the credit cards, but I didn't know.

Aside from the larger down payment issue, the old mortgage and equity loan will really hurt my DTI ratio (I'm assuming they'll count it). So I've been thinking about taking a personal loan to pay off the $27k remaining on the old mortgage and I can accelerate the equity loan ($11k) and pay off in November (but only add $4400 to savings between now and then, if I do). NFCU just sent me an offer for a $0 down mortgage, which I hope will be good until November.

Is it allowed to use a personal loan to pay off a mortgage? I think my FICO score should be able to take the hit (EQ: 812, TU98: 798). And if it's allowed, will I then be required to wait 6 months after the new loan to apply for a mortgage? Or is that just recommended to recover some FICO points?

TIA for any help.

[Lel]

Just a couple quick comments:

The payments on your new personal loan will still be calculated in your DTI ratio, so it's not going to help you there.

The interest rate on the personal loan will probably be higher than your mortgage rate, so it would cost you more money in the long term.

The interest on a personal loan is not tax-deductible (at least I don't think it is).

[Anonymous]

There are alot of questions here.

First, does it really make sense to keep the other property without at least renting it.  The upkeep, taxes, etc may well outweigh any gains when you consider that it may be 5-10 years before most areas are really turned around and have made back much of the gains they have lost.  So if 5 years of taxes and upkeep come even reasonable close (when added to what you think you could sell it now for) to what you would like to get out of it, you are probably better off selling it now while rates are low and there are some buyers out there.  Again, I dont know your particular situation or market, but alot of people think holding on to a home to wait for it to go up 5-10% in value is better than selling now when often the costs involved is not worth it.  Then, the payments you are making now and the equity you have in the property would be yours to use in the meantime.  Either way, it is a decision for you, not me.

If I were in your shoes, and determined to keep the other property, I would just use the $ you have saved along with the money you are paying in mortgage payments currently to pay off the loan right away.  Then I would take all the extra $ to pay off the personal loan.  It sounds like you would be able to do that failry quickly.  Then you can move forward getting money put aside for a home purchase.  With the other mortgage paid off, DTI nice and low, and high FICO, getting a loan with 5-10% down should be no problem.  If you are worried about paying PMI, you can always put extra money towards the new mortgage to pay it down and get the PMI removed rather quickly.

Getting a personal loan is probably not a smart move.  The payment on a personal loan is not going to be very low.  You are probably looking at 500+ payment on that per month (depending upon the terms) 

[Anonymous]

OK, here's some more details:

the personal loan payment would only cost me $167 more than the mortgage payment, still leaving $2233 mo. for savings. The interest rate on the mortgage is 7% (7.5 years left); interest rate on the personal loan would be 9.74% (for 5 years), but I should be able to pay it off in 3 years, even with a new mortgage. The difference in interest cost isn't huge, under that scenario. Mortgage interest isn't helping me much on the tax return now, so I'm not worried about that. I'm more worried about getting rid of the mortgage so 1) it doesn't count toward PITI and 2) I have a place to live if I get laid off in the future (you never know these days). My DTI can handle the personal loan payment on the back end, but not 2 mortgages on the front end. They eat up 12% of the 28% allowed.

I don't really want to spend all my savings paying off the mortgage now, in case of layoff (I'd have nothing in reserve). I've considered saving the $2400 mo., paying off the equity loan in Nov. and the mortgage next May, which would leave me with at least $15k in savings at all times. But I'm afraid the $0 down mortgage won't be good until May and interest rates will shoot up between now and then. Also, my better half is getting real tired of paying a landlord $10k a year.

As for the out of state property, I should've specified that it's not for sale or rent because no one wants to live in it. Long story, but suffice it to say that something nasty was built next to it, which is why we left. I expect the nasty thing will be gone in about 5 years, and the place will become saleable again. It's good farm land and hardwoods. I don't want to give it away just to be rid of it. We can have it logged to help pay for the taxes and if we get real hard up, we could always auction it in the future. For now, it's a guaranteed place to live if we go broke and can't afford to stay in NH.

So basically, I'm just wondering if it's ok to pay a mortgage off with a personal loan and if I'd be able to get a mortgage soon after that. If I have to wait for a year after taking a personal loan, then I may as well just pay the mortgage off myself and not bother with the loan.

Hope that helps explain it a little better.

[Lel]

Someone correct me if I'm wrong, but I thought that if you have a mortgage on a first home and you want to buy a second home, the debt associated with the first home is considered to be part of the back-end DTI.  That is, the front-end DTI for the purchase of the second home is based solely on the PITIA of the second home.

I could be completely wrong about this.

[Anonymous]

I think you might be right, from my search results. But they have strict requirements when you're buying a second home as a primary residence. From what I read, six months reserves to cover both mortgages, 75% equity in the place, and if you claim to have it rented, they want all manner of proof. For conforming loans, anyway. Might be different for different mortgage types and lenders.

I can't meet all of the requirements, so I need to get rid of the old mortgage.

[ShanetheMortgageMan]

I think you have the guidelines confused on what exactly would apply to your situation.  The guidelines you have listed only apply when a primary residence it being converted to a rental property or second home, but since you have already left the residence well over a year ago it does not follow those guidelines.  

The payment on it will be included in the total debt ratio, not housing/PITI ratio (like Lel said), just like any other consumer debt.  

You would be converting low interest rate debt for high interest rate debt, if you paid the existing lower rate mortgage in 3 years rather than 7 years you'd be saving more interest than if you refinanced into a higher rate personal loan and paid it in 3 years.

Just to clarify for anyone else who may be following along, when you are converting your primary residence to a rental property and want to use the rental income to offset the existing mortgage payment, Fannie Mae & Freddie Mac require you have 30% equity in the home, a copy of the fully executed lease agreement, and the receipt of a security deposit from the tenant and deposit into the borrower’s account.  If the 30% equity isn't there (determined by an appraisal) the rental income cannot be used to offset the mortgage payment.  You are also required to have reserves in the amount of whatever automated underwriting will approve (sometimes it's 2, sometimes it's 6, etc. depending on the rest of the borrowing profile), except for if PMI coverage is required, then 6 months reserves is always needed by the PMI insurers.  If you are applying for an FHA loan it's a bit more simple, only 25% equity is needed, lease agreement, receipt of security deposit/evidence of deposit... no reserves are required.

[Anonymous]

Thanks, Shane (I was hoping you'd answer).

I found those guidelines at this site:

http://www.finweb.com/real-estate/buying-a-second-home-as-a-primary-residence.html

but I guess it's not always accurate just 'cuz it's on the web. Like most of the info I found, they always assume you're going to rent out the first house when you buy another.

I guess I should find out whether Navy Federal will consider our first house to be a "second home" or not. We have a cabin in the woods there and spend 10 days during deer season in it, then maybe 2 or 3 other trips a year to winterize and de-winterize the house, brush hog the lawn and check the security system. This year, we aren't even going to go for deer season. If I could find someone there that I could trust as a caretaker, I would never go there at all.

If they won't count is as a second home, then there's no advantage to getting the personal loan.

Thanks very much for the help.

[ShanetheMortgageMan]

Welcome.  It doesn't matter if they consider it a second home or investment property, as it'll be included in your debt to income ratio the same either way.

[Anonymous]

OK, that certainly makes things easier. Thanks again!